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03 The Matching Concept and the Adjusting Process
03 The Matching Concept and the Adjusting Process
03 The Matching Concept and the Adjusting Process
03 The Matching Concept and the Adjusting Process
03 The Matching Concept and the Adjusting Process
03 The Matching Concept and the Adjusting Process
03 The Matching Concept and the Adjusting Process
03 The Matching Concept and the Adjusting Process
03 The Matching Concept and the Adjusting Process
03 The Matching Concept and the Adjusting Process
03 The Matching Concept and the Adjusting Process
03 The Matching Concept and the Adjusting Process
03 The Matching Concept and the Adjusting Process
03 The Matching Concept and the Adjusting Process
03 The Matching Concept and the Adjusting Process
03 The Matching Concept and the Adjusting Process
03 The Matching Concept and the Adjusting Process
03 The Matching Concept and the Adjusting Process
03 The Matching Concept and the Adjusting Process
03 The Matching Concept and the Adjusting Process
03 The Matching Concept and the Adjusting Process
03 The Matching Concept and the Adjusting Process
03 The Matching Concept and the Adjusting Process
03 The Matching Concept and the Adjusting Process
03 The Matching Concept and the Adjusting Process
03 The Matching Concept and the Adjusting Process
03 The Matching Concept and the Adjusting Process
03 The Matching Concept and the Adjusting Process
03 The Matching Concept and the Adjusting Process
03 The Matching Concept and the Adjusting Process
03 The Matching Concept and the Adjusting Process
03 The Matching Concept and the Adjusting Process
03 The Matching Concept and the Adjusting Process
03 The Matching Concept and the Adjusting Process
03 The Matching Concept and the Adjusting Process
03 The Matching Concept and the Adjusting Process
03 The Matching Concept and the Adjusting Process
03 The Matching Concept and the Adjusting Process
03 The Matching Concept and the Adjusting Process
03 The Matching Concept and the Adjusting Process
03 The Matching Concept and the Adjusting Process
03 The Matching Concept and the Adjusting Process
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03 The Matching Concept and the Adjusting Process

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Courtesy of H. Andre Hernowo, SE,M.Si,Ak

Courtesy of H. Andre Hernowo, SE,M.Si,Ak

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  • 1. Chapter 3 Power Notes The Matching Concept and the Adjusting Process Learning Objectives 1. The Matching Concept 2. Nature of the Adjusting Process 3. Recording Adjusting Entries 4. Summary of Adjustment Process 5. Financial Analysis and Interpretation C3 C3 - 1
  • 2. Chapter 3 Power Notes The Matching Concept and the Adjusting Process Slide # Power Note Topics 3 • Reporting Revenue and Expense 6 • The Matching Concept 9 • Trial Balance, Chart of Accounts 20 • Deferrals and Accruals 36 • Summary of Adjustments 41 • Vertical Analysis Note: To select a topic, type the slide # and press Enter. C3 - 2
  • 3. Reporting Revenue and Expense TWO METHODS Cash Basis of Accounting Accrual Basis of Accounting C3 - 3
  • 4. Cash Basis of Accounting Revenue reported when cash is received Expense reported when cash is paid Does not properly match revenues and expenses C3 - 4
  • 5. Accrual Basis of Accounting Revenue reported when earned Expense reported when incurred Properly matches revenues and expenses in determining net income Requires adjusting entries at end of period It just sounds mean – it really isn’t C3 - 5
  • 6. The Matching Concept Debits = Credits Liabilities Assets Owner’s EquityExpenses Revenues C3 - 6
  • 7. The Matching Concept Debits = Credits Liabilities Assets Owner’s Equity Net IncomeExpenses Revenues C3 - 7
  • 8. The Matching Concept Debits = Credits Liabilities Assets Owner’s Equity Net Income Expenses Revenues matchingNet income is determined by properly matching expenses and revenues. C3 - 8
  • 9. NetSolutions Unadjusted Trial Balance December 31, 2002 11 Cash 2,065 12 Accounts Receivable 2,220Assets 14 Supplies 2,000 15 Prepaid Insurance 2,400 17 Land 20,000 18 Office Equipment 1,800 C3 - 9
  • 10. NetSolutions Unadjusted Trial Balance December 31, 2002 11 Cash 2,065 12 Accounts Receivable 2,220 14 Supplies 2,000 15 Prepaid Insurance 2,400 17 Land 20,000 18 Office Equipment 1,800Liabilities 21 Accounts Payable 900 23 Unearned Rent 360 C3 - 10
  • 11. NetSolutions Unadjusted Trial Balance December 31, 2002 11 Cash 2,065 12 Accounts Receivable 2,220 14 Supplies 2,000 15 Prepaid Insurance 2,400 17 Land 20,000 18 Office Equipment 1,800 21 Accounts Payable 900 23 Unearned Rent 360Owner’s 31 Chris Clark, Capital 25,000 Equity 32 Chris Clark, Drawing 4,000 C3 - 11
  • 12. NetSolutions Unadjusted Trial Balance December 31, 2002 11 Cash 2,065 12 Accounts Receivable 2,220 14 Supplies 2,000 15 Prepaid Insurance 2,400 17 Land 20,000 18 Office Equipment 1,800 21 Accounts Payable 900 23 Unearned Rent 360 31 Chris Clark, Capital 25,000 32 Chris Clark, Drawing 4,000Revenue 41 Fees Earned 16,340 C3 - 12
  • 13. NetSolutions Unadjusted Trial Balance December 31, 2002 11 Cash 2,065 12 Accounts Receivable 2,220 14 Supplies 2,000 15 Prepaid Insurance 2,400 17 Land 20,000 18 Office Equipment 1,800 21 Accounts Payable 900 23 Unearned Rent 360 31 Chris Clark, Capital 25,000 32 Chris Clark, Drawing 4,000 41 Fees Earned 16,340 51 Wages Expense 4,275 52 Rent Expense 1,600Expenses 54 Utilities Expense 985 55 Supplies Expense 800 59 Miscellaneous Expense 455 42,600 42,600 C3 - 13
  • 14. NetSolutions Unadjusted Trial Balance December 31, 200211 Cash 2,06512 Accounts Receivable 2,22014 Supplies 2,00015 Prepaid Insurance 2,40017 Land 20,00018 Office Equipment 1,80021 Accounts Payable 90023 Unearned Rent 36031 Chris Clark, Capital 25,00032 Chris Clark, Drawing 4,00041 Fees Earned 16,34051 Wages Expense 4,27552 Rent Expense 1,60054 Utilities Expense 98555 Supplies Expense 80059 Miscellaneous Expense 455 42,600 42,600 C3 - 14
  • 15. NetSolutions Expanded Chart of Accounts Balance Sheet Income Statement1. Assets 4. Revenue11 Cash 41 Fees Earned12 Accounts Receivable 42 Rent Revenue14 Supplies 5. Expenses15 Prepaid Insurance 51 Wages Expense17 Land 52 Rent Expense18 Office Equipment 53 Depreciation Expense19 Accumulated Depreciation 54 Utilities Expense2. Liabilities 55 Supplies Expense21 Accounts Payable 56 Insurance Expense22 Wages Payable 59 Miscellaneous Expense23 Unearned Rent3. Owner’s Equity31 Chris Clark, Capital32 Chris Clark, Drawing C3 - 15
  • 16. NetSolutions Expanded Chart of Accounts Balance Sheet Income Statement1. Assets 4. Revenue11 Cash 41 Fees Earned12 Accounts Receivable 42 Rent Revenue14 Supplies 5. Expenses15 Prepaid Insurance 51 Wages Expense17 Land 52 Rent Expense18 Office Equipment 53 Depreciation Expense19 Accumulated Depreciation 54 Utilities Expense2. Liabilities 55 Supplies Expense21 Accounts Payable 56 Insurance Expense22 Wages Payable 59 Miscellaneous Expense23 Unearned Rent3. Owner’s Equity31 Chris Clark, Capital32 Chris Clark, Drawing C3 - 16
  • 17. NetSolutions Expanded Chart of Accounts Balance Sheet Income Statement1. Assets 4. Revenue11 Cash 41 Fees Earned12 Accounts Receivable 42 Rent Revenue14 Supplies 5. Expenses15 Prepaid Insurance 51 Wages Expense17 Land 52 Rent Expense18 Office Equipment 53 Depreciation Expense19 Accumulated Depreciation 54 Utilities Expense2. Liabilities 55 Supplies Expense21 Accounts Payable 56 Insurance Expense22 Wages Payable 59 Miscellaneous Expense23 Unearned Rent3. Owner’s Equity31 Chris Clark, Capital32 Chris Clark, Drawing C3 - 17
  • 18. NetSolutions Expanded Chart of Accounts Balance Sheet Income Statement1. Assets 4. Revenue11 Cash 41 Fees Earned12 Accounts Receivable 42 Rent Revenue14 Supplies 5. Expenses15 Prepaid Insurance 51 Wages Expense17 Land 52 Rent Expense18 Office Equipment 53 Depreciation Expense19 Accumulated Depreciation 54 Utilities Expense2. Liabilities 55 Supplies Expense21 Accounts Payable 56 Insurance Expense22 Wages Payable 59 Miscellaneous Expense23 Unearned Rent3. Owner’s Equity31 Chris Clark, Capital32 Chris Clark, Drawing C3 - 18
  • 19. NetSolutions Expanded Chart of Accounts Balance Sheet Income Statement1. Assets 4. Revenue11 Cash 41 Fees Earned12 Accounts Receivable 42 Rent Revenue14 Supplies 5. Expenses15 Prepaid Insurance 51 Wages Expense17 Land 52 Rent Expense18 Office Equipment 53 Depreciation Expense19 Accumulated Depreciation 54 Utilities Expense2. Liabilities 55 Supplies Expense21 Accounts Payable 56 Insurance Expense22 Wages Payable 59 Miscellaneous Expense23 Unearned Rent3. Owner’s Equity31 Chris Clark, Capital32 Chris Clark, Drawing C3 - 19
  • 20. Adjustments – Deferrals and AccrualsRevenues Current Period Future PeriodDeferrals Cash Received Revenue Recorded C3 - 20
  • 21. Adjustments – Deferrals and AccrualsRevenues Current Period Future PeriodDeferrals Cash Received Revenue RecordedAccruals Revenue Recorded Cash Received C3 - 21
  • 22. Adjustments – Deferrals and AccrualsRevenues Current Period Future PeriodDeferrals Cash Received Revenue RecordedAccruals Revenue Recorded Cash ReceivedExpenses Current Period Future PeriodDeferrals Cash Paid Expense Recorded C3 - 22
  • 23. Adjustments – Deferrals and AccrualsRevenues Current Period Future PeriodDeferrals Cash Received Revenue RecordedAccruals Revenue Recorded Cash ReceivedExpenses Current Period Future PeriodDeferrals Cash Paid Expense RecordedAccruals Expense Recorded Cash Paid C3 - 23
  • 24. Adjustments – Deferred ExpenseOn December 1, NetSolutions purchased insurancefor 24 months at a cost of $2,400. Example P1 – Purchase initially recorded as an asset. Adjustment A1 – Record Cash insurance used for P1..... 2,400 December, $100. Prepaid Insurance Assets P1..... 2,400 Insurance Expense Expenses C3 - 24
  • 25. Adjustments – Deferred ExpenseOn December 1, NetSolutions purchased insurancefor 24 months at a cost of $2,400. Example P1 – Purchase initially recorded as an asset. Adjustment A1 – Record Cash insurance used for P1..... 2,400 December, $100. Prepaid Insurance Assets P1..... 2,400 A1..... 100 A1 Insurance Expense A1 A1.....100 Expenses C3 - 25
  • 26. Adjustments – Deferred ExpenseOn December 1, NetSolutions purchased insurancefor 24 months at a cost of $2,400. Example P2 – Purchase initially recorded as an expense. Adjustment A2 – Record Cash insurance unused as of P2..... 2,400 December 31. Prepaid Insurance Assets Insurance Expense P2..... 2,400 Expenses C3 - 26
  • 27. Adjustments – Deferred ExpenseOn December 1, NetSolutions purchased insurancefor 24 months at a cost of $2,400. Example P2 – Purchase initially recorded as an expense. Adjustment A2 – Record Cash insurance unused as of P2..... 2,400 December 31. Prepaid Insurance Assets A2..... 2,300 A2 A2 Insurance Expense P2..... 2,400 A2.....2,300 Expenses C3 - 27
  • 28. Adjustments – Deferred RevenueOn December 1, NetSolutions received cash of $360 forthree months’ rent beginning December 1. Example S1 – Sale initially recorded as a liability. Adjustment A3 – Record rent Cash earned for December. S1..... 360 Unearned Rent Liabilities S1..... 360 Rent Revenue Revenues C3 - 28
  • 29. Adjustments – Deferred RevenueOn December 1, NetSolutions received cash of $360 forthree months’ rent beginning December 1. Example S1 – Sale initially recorded as a liability. Adjustment A3 – Record rent Cash earned for December. S1..... 360 Unearned Rent Liabilities A3..... 120 S1..... 360 A3A3 Rent Revenue A3.....120 Revenues C3 - 29
  • 30. Adjustments – Deferred RevenueOn December 1, NetSolutions received cash of $360 forthree months’ rent beginning December 1. Example S2 – Sale initially recorded as revenue. Adjustment A4 – Record rent Cash unearned as of December 31. S2..... 360 Unearned Rent Liabilities Rent Revenue S2.....360 Revenues C3 - 30
  • 31. Adjustments – Deferred RevenueOn December 1, NetSolutions received cash of $360 forthree months’ rent beginning December 1. Example S2 – Sale initially recorded as revenue. Adjustment A4 – Record rent Cash unearned as of December 31. S2..... 360 Unearned Rent Liabilities A4..... 240 A4 A4 Rent Revenue A4..... 240 S2.....360 Revenues C3 - 31
  • 32. Adjustments – Accrued ExpenseNetSolutions received employee services for the last twodays of December amounting to $250, to be paid later.Adjustment A5 – Record accrued wages of $250. Wages Payable Liabilities Wages Expense Bal.....4,275 Expenses C3 - 32
  • 33. Adjustments – Accrued ExpenseNetSolutions received employee services for the last twodays of December amounting to $250, to be paid later.Adjustment A5 – Record accrued wages of $250. Wages Payable Liabilities A5..... 250 A5 Wages Expense A5 Bal.....4,275 Expenses A5.....250 C3 - 33
  • 34. Adjustments – Accrued RevenueAs of December 31, NetSolutions provided 25 hours ofservices at $20 per hour to be billed next month.Adjustment A6 – Record accrued fees earned of $500. Accounts Receivable Assets Bal.....2,220 Fees Earned Bal....16,340 Revenues C3 - 34
  • 35. Adjustments – Accrued RevenueAs of December 31, NetSolutions provided 25 hours ofservices at $20 per hour to be billed next month.Adjustment A6 – Record accrued fees earned of $500. Accounts Receivable Assets Bal.....2,220 A6..... 500 A6 Fees Earned A6 Bal....16,340 Revenues A6.....500 C3 - 35
  • 36. Summary of Adjustments Buying SideDeferredExpenses Assets A1 A2ExpensesRearranging the Debits C3 - 36
  • 37. Summary of Adjustments Buying Side Selling SideDeferred DeferredExpenses Revenues Assets Liabilities A1 A2 A3 A4Expenses RevenuesRearranging Rearranging the Debits the Credits C3 - 37
  • 38. Summary of AdjustmentsBuying Side Selling Side Accrued Expenses Liabilities A5 Expenses Adding a New Transaction C3 - 38
  • 39. Summary of AdjustmentsBuying Side Selling Side Accrued Accrued Expenses Revenues Liabilities Assets A5 A6 Expenses Revenues Adding a New Adding a New Transaction Transaction C3 - 39
  • 40. Summary of Adjustments Buying Side Selling SideDeferred Accrued Deferred AccruedExpenses Expenses Revenues Revenues Assets Liabilities Liabilities Assets A1 A2 A5 A3 A4 A6Expenses Expenses Revenues RevenuesRearranging Adding a New Rearranging Adding a New the Debits Transaction the Credits Transaction C3 - 40
  • 41. Financial Analysis and Interpretation Objective: Use vertical analysis to compare financial statement items with each other and with industry averages. Comparative Income Statements For the Years Ended December 31, 2003 and 2002 2003 2002 Amount Percent Amount PercentFees earned $ 187,500 100.0% $ 150,000 100.0%Operating expenses: Wages expense $ 60,000 32.0% $ 45,000 30.0% Rent expense 15,000 8.0 Vertical Analysis: Wages expense $ 60,000 = 32.0% Fees earned $ 187,500 C3 - 41
  • 42. Chapter 3 Power Notes The Matching Concept and the Adjusting Process This is the last slide in Chapter 3. Note: To see the topic slide, type 2 and press Enter. C3 - 42

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